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ECN 3101 : MIKROEKONOMI

ECN 3101 : MIKROEKONOMI. Dr Normaz Wana Ismail Bilik E231 Jabatan Ekonomi Fakulti Ekonomi & Pengurusan UPM, 43400 Serdang Email:-nwi@econ.upm.edu.my Tel:-03-89467708. Virtual class. FEP’s website http://www.econ.upm.edu.my/2007/wmv/ click ‘ Kelas maya ’. TOPICS.

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ECN 3101 : MIKROEKONOMI

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  1. ECN 3101 : MIKROEKONOMI Dr NormazWana Ismail Bilik E231 JabatanEkonomi FakultiEkonomi & Pengurusan UPM, 43400 Serdang Email:-nwi@econ.upm.edu.my Tel:-03-89467708 Chapter 1

  2. Virtual class • FEP’s website http://www.econ.upm.edu.my/2007/wmv/ • click ‘Kelasmaya’ Chapter 1

  3. Chapter 1

  4. TOPICS • Introduction: demand and Supply • Consumer Behavior • Individual demand and Market • Production and Cost • Perfect Competition • Monopoly • Monopolistic Competition • Ologopoly Chapter 1

  5. Chapter 1 Preliminaries

  6. Themes of Microeconomics • Microeconomics deals with limits • Limited budgets • Limited time • Limited ability to produce • How do we make the most of limits? • How do we allocate scarce resources? Chapter 1

  7. Themes of Microeconomics • Workers, firms and consumers must make trade-offs • Do I work or go on vacation? • Do I purchase a new car or save my money? • Do we hire more workers or buy new machinery? • How are these trade-offs best made? Chapter 1

  8. Themes of Microeconomics • Consumers • Limited incomes • Consumer theory – describes how consumers maximize their well-being, using their preferences, to make decisions about trade-offs. • How do consumers make decisions about consumption and savings? Chapter 1

  9. Themes of Microeconomics • Workers • Individuals decide when and if to enter the work-force • Trade-offs of working now or obtaining more education/training • What choices do individuals make in terms of jobs or work places? • How many hours do individuals choose to work? • Trade-off of labor and leisure Chapter 1

  10. Themes of Microeconomics • Firms • What types of products do firms produce? • Constraints on production capacity & financial resources create needs for trade-offs. • Theory of the Firm – describes how these trade-offs are best made Chapter 1

  11. Themes of Microeconomics • Prices • Trade-offs are often based on prices faced by consumers and producers • Workers made decisions based on prices for labor – wages • Firms make decisions based on wages and prices for inputs and on prices for the goods they produce-firm decide to hire more workers or purchase more machines Chapter 1

  12. Themes of Microeconomics • Prices • How are prices determined? • Centrally planned economies -governments control prices • Market economies – prices determined by interaction of market participants • Markets – collection of buyers and sellers whose interaction determines the prices of goods. Chapter 1

  13. Theories and Models • Economics is concerned with explanation of observed phenomena • Theories are used to explain observed phenomena in terms of a set of basic rules and assumptions. • The Theory of the Firm – firms max profits ( the theory that explains how firm chooses the amounts of L,K,E that they use for production and the amount of output they produce) • The Theory of Consumer Behavior Chapter 1

  14. Theories and Models • Theories are used to make predictions • Economic models are created from theories • Models are mathematical representations used to make quantitative predictions Chapter 1

  15. Theories and Models • Validating a Theory • The validity of a theory is determined by the quality of its prediction, given the assumptions. • Theories must be tested and refined • Theories are invariably imperfect – but gives much insight into observed phenomena Chapter 1

  16. Positive & Normative Analysis • Positive Analysis – statements that describe the relationship of cause and effect • Questions that deal with explanation and prediction • What will be the impact of an import quota on foreign cars? • What will be the impact of an increase in the gasoline excise tax? Chapter 1

  17. Positive & Normative Analysis • Normative Analysis – analysis examining questions of what ought to be • Often supplemented by value judgments • Should the government impose a larger gasoline tax? • Should the government decrease the tariffs on imported cars? Chapter 1

  18. Market • Collection of buyers and sellers, through their actual or potential interaction, determine the prices of products • What is Markets • Type of Market • Market Price • Why Market is important Chapter 1

  19. SUPPLY AND DEMAND • What are supply and demand? • What is the market mechanism? • What are the effects of changes in market equilibrium? • What are elasticity of supply and demand? Chapter 1

  20. Supply • If a firm supplies a good or service, then the firm • 1. Has the resources and the technology to produce it, • 2. Can profit from producing it, and • 3. Has made a definite plan to produce and sell it. • Resources and technology determine what it is possible to produce. Supply reflects a decision about which technologically feasible items to produce. • The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price.

  21. S P2 P1 Q1 Q2 The Supply Curve Price ($ per unit) The Supply Curve Graphically The supply curve slopes upward demonstrating that at higher prices firms will increase output Quantity Chapter 2

  22. S S’ P1 P2 Q0 Q1 Q2 Change in Supply P • The cost of raw materials falls • Produced Q1 at P1 and Q0 at P2 • Now produce Q2 at P1 and Q1 at P2 • Supply curve shifts right to S’ Q Chapter 2

  23. The Supply Curve-summary • Change in Quantity Supplied • Movement along the curve caused by a change in price • Change in Supply • Shift of the curve caused by a change in something other than price • Change in costs of production Chapter 2

  24. Demand • If you demand something, then you • 1. Want it, • 2. Can afford it, and • 3. Have made a definite plan to buy it. • Wants are the unlimited desires or wishes people have for goods and services. Demand reflects a decision about which wants to satisfy. • The quantity demanded of a good or service is the amount that consumers plan to buy during a particular time period, and at a particular price.

  25. P2 P1 D Q2 Q1 The Demand Curve Price ($ per unit) The demand curve slopes downward demonstrating that consumers are willing to buy more at a lower price as the product becomes relatively cheaper. Quantity Chapter 2

  26. Demand • A Shift of the Demand Curve • If the price remains the same but one of the other influences on buyers’ plans changes, • demand changes and the demand curve shifts.

  27. Demand • Six main factors that change demand are • The prices of related goods • Expected future prices • Income • Expected future income • Population • Preferences

  28. The Market Mechanism • The market mechanism is the tendency in a free market for price to change until the market clears • Markets clear when quantity demanded equals quantity supplied at the prevailing price • Market Clearing price – price at which markets clear Chapter 2

  29. S Price ($ per unit) P0 D Quantity Q0 The Market Mechanism The curves intersect at equilibrium, or market- clearing, price. Quantity demanded equals quantity supplied at P0 Chapter 2

  30. ELASTICITY OF DEMAND AND SUPPLY

  31. Price Elasticity of Demand • Measures the sensitivity of quantity demanded to price changes. • It measures the percentage change in the quantity demanded of a good that results from a one percent change in price. Chapter 2

  32. Elasticities for Linear Demand Curves • For linear demand curves re-write the price elasticity of demand formula as: • Notice that the first term is related to the slope of the demand curve • The second term is the initial price divided by the initial quantity 2-32

  33. Other Demand Elasticities • Income Elasticity of Demand • Measures how much quantity demanded changes with a change in income. Chapter 2

  34. Other Demand Elasticities • Cross-Price Elasticity of Demand • Measures the percentage change in the quantity demanded of one good that results from a one percent change in the price of another good. Chapter 2

  35. Chapter 3 Consumer Behavior

  36. Introduction • How are consumer preferences used to determine demand? • How do consumers allocate income to the purchase of different goods? • How do consumers with limited income decide what to buy? Chapter 3

  37. Consumer Behavior • There are three steps involved in the study of consumer behavior • Consumer Preferences • To describe how and why people prefer one good to another • Budget Constraints • People have limited incomes Chapter 3

  38. Consumer Behavior • Given preference sand limited incomes, what amount and type of goods will be purchased? • What combination of goods will consumers buy to maximize their satisfaction? Chapter 3

  39. B 50 Clothing H E 40 A 30 D 20 G U1 10 Food 10 20 30 40 Indifference Curves: An Example • Indifferent between B, A, & D • E is preferred to U1 • U1is preferred to H & G Chapter 3

  40. Indifference Curves • We measure how a person trades one good for another using the marginal rate of substitution (MRS) • It quantifies the amount of one good a consumer will give up to obtain more of another good. • It is measured by the slope of the indifference curve. Chapter 3

  41. A Clothing 16 14 -6 12 B 10 1 -4 8 D 1 6 E -2 G 4 1 -1 1 2 Food 1 2 3 4 5 Marginal Rate of Substitution MRS = 6 MRS = 2 Chapter 3

  42. Budget Constraints • Preferences do not explain all of consumer behavior. • Budget constraints also limit an individual’s ability to consume in light of the prices they must pay for various goods and services. Chapter 3

  43. Budget Constraints • The Budget Line • Indicates all combinations of two commodities for which total money spent equals total income. • We assume only 2 goods are consumed, so we do not consider savings Chapter 3

  44. Clothing (I/PC) = 40 A B 30 10 D 20 20 E 10 G Food 0 20 40 60 80 = (I/PF) The Budget Line Chapter 3

  45. Clothing (units per week) 40 L2 L1 L3 (PF = 1/2) (PF = 1) Food (units per week) (PF = 2) 80 160 120 40 The Budget Line - Changes A decrease in the price of food to $.50 changes the slope of the budget line and rotates it outward. An increase in the price of food to $2.00 changes the slope of the budget line and rotates it inward. Chapter 3

  46. Consumer Choice • A corner solution exists if a consumer buys in extremes, and buys all of one category of good and none of another. • MRS is not necessarily equal to PA/PB Chapter 3

  47. Frozen Yogurt (cups monthly) A U1 U2 U3 B Ice Cream (cup/month) A Corner Solution A corner solution exists at point B. Chapter 3

  48. Frozen Yogurt (cups monthly) A U1 U2 U3 B Ice Cream (cup/month) A Corner Solution • if the consumer could give up more frozen yogurt for ice cream he would do so. • However, there is no more frozen yogurt to give up • At point B, the MRS of ice cream for frozen yogurt is greater than the slope of the budget line. Chapter 3

  49. Chapter 4 Individual and Market Demand

  50. Individual Demand • Price Changes • Using the figures developed in the previous chapter, the impact of a change in the price of food can be illustrated using indifference curves. • For each price change, we can determine how much of the good the individual would purchase given their budget lines and indifference curves Chapter 4

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